by The Tenth Circuit has declared what will surprise few: that a lien may not be stripped under section 506(d) in a chapter 13 case. Woolsey v. Citibank, No. 11-4014 (10th Cir. Sept. 4, 2012).
The court made quick work of the preliminary issues finding that the lien was both “allowed” under section 502, and wholly unsecured under section 506(a). Though agreeing with the logic of the debtor’s argument that the plain language of section 506(a) and (d) would lead to the conclusion that a lien that is wholly unsecured is void in its entirety, the court found that this reading of the statute has been precluded since the 1992 decision in Dewsnup v. Timm, 502 U.S. 410 (1992), and logic no longer applies to interpretation of those provisions. With some reluctance, the court rejected the debtor’s invitation to limit the Dewsnup holding to chapter 7 cases and reinterpret section 506(d) for purposes of chapter 13. The court recognized that though lower courts are helpless to subject Dewsnup to direct assault they have chipped it down to its core by limiting it to the narrow issue it addressed. However, that narrow issue bears directly on the debtor’s claim in this case, that section 506(d) permits voidance of an unsecured lien, and Dewsnup’s rejection of this argument cannot be chipped away. The court concluded that section 506(d) means what Dewsnup says it means, whether applied in chapter 7 or chapter 13. Any other finding would endow one term in one provision with two different meanings depending upon context, and this limitation of Dewsnup was too offensive to statutory interpretation to bear consideration.
The court closed by offering the relief that has availed most chapter 13 debtors faced with unsecured liens – section 1322(b)(2). Noting that most circuits, under the reasoning of Nobelman v. American Savings Bank, 508 U.S. 324 (1993), have allowed lien stripping in chapter 13 under this provision, and specifically referencing NACBA’s amicus brief endorsing this avenue for relief, the court returned to the debtor’s steadfast refusal—despite invitations, hints and direct requests—to rely on this provision for relief. The court appeared mystified by debtor’s avenue of attack saying: “Before us, though, the Woolseys don’t just shrink from, they repudiate the only possible winning argument they may have had.” It thus limited its opinion to the single question before it: whether section 506(d) permits lien stripping in chapter 13 and left the question of stripping under section 1322(b)(2) for another day, thereby continuing to be one of the few circuit courts that has not yet ruled on the issue.
It should be noted, however, that the Eleventh Circuit, in the unpublished opinion of McNeal v. GMAC, No. 11-11352 (11th Cir. May 11, 2012), recently took a new chip out of Dewsnup. In that case the court found that in chapter 7 cases where the lien is wholly unsecured Dewsnup, which dealt with a partially secured lien, did not govern. Instead a pre-Dewsnup Eleventh Circuit case, Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), dictated that the wholly unsecured lien may be stripped under section 506(d).
As a practical matter, it should not make a difference to the debtor whether the lien is stripped pursuant to section 1322(b) or section 506(d) because in either event, the lien strip does not have permanent effect until the close of the case. Although a lien strip under 506(d) appears to take immediate effect, as opposed to a lien strip under section 1322(b) which takes effect only at the conclusion of the plan, should the debtor fail to complete the plan the lien would be reinstated. Thus, the Woolsey argument is essentially tilting at Dewsnuppian windmills to no avail.
What does this mean to debtors? Stick with the authority to lien strip using 506(a) and 1322(b)(2), whenever possible.